Tuesday March 5, 2024

What can manufacturers expect from the Spring Budget?

Arguably, if Make UK – the manufacturers’ organisation – had their way, this would be the last Spring Budget ever.

As part of its ‘wishlist’ for this year’s event, the trade body has called for government fiscal policy to be set out once a year, at the start of Parliament, rather than drip-fed across what has come to be the traditional Spring and Autumn announcements.

While it remains to be seen whether the next government administration adopts this recommendation, it reflects a demand for clarity and certainty from the sector as it looks to drive future growth amid still challenging conditions.

Although there are green shoots in the economy in the form of easing inflation and pockets of strengthening demand, producers are still being squeezed by relatively high input costs in areas like energy and commodities, battling new supply chain challenges stemming from geopolitical tensions in the Red Sea and working with relatively thin order books.

Against this backdrop, the sector will be hoping that the Chancellor has engineered support packages for them. But, as we’ve discussed in our broader article on the prospects for this year’s Budget, tight fiscal conditions mean that it is unlikely to be a blockbuster event in terms of giveaways – even in what is expected to be an election year. What will the sector be looking out for as he takes to the despatch box?

Investment, growth and skills

High on the sector’s agenda will be measures that incentivise investment, support more profitable operations and drive output and productivity.

A potential prospect here is further change to the full expensing allowance – the measure that effectively gives businesses 25p of tax relief for every £1 invested in qualifying plant and machinery.

At the Autumn Statement in November 2023, this was changed from a temporary relief to a permanent one, and is a relief welcomed by manufacturers – nearly three in five (59%) of those surveyed by Make UK said they would be taking advantage of it.

But the range of full expensing is still somewhat constrained, chiefly by its exclusion of second-hand machinery. Expanding it by bringing previously-owned equipment into scope would be a potentially powerful enabler of investment – particularly for SME or specialist businesses.

R&D support will also be in manufacturers’ sights.

The merger of the SME and large company R&D schemes – also unveiled at the Autumn Statement – is set to go ahead in April, and will provide much-needed simplification of innovation support. What many businesses will be hoping for now, however, is more in terms of actual deductions, with calls already made for specific support in areas like digitalisation, automation and carbon emissions.

These are all issues that sit at the intersection of the sector’s growth and productivity priorities, and the government’s wider industrial and environmental plans – an apparent win-win if it can be delivered. But with so little fiscal headroom to play with, they may end up manifesto points, rather than surprises from the red box.

So, where might the Chancellor choose to spend the money that he does have instead? A potential move rumored to be under Treasury consideration is a further cut to National Insurance (NI).

Seemingly good news on the surface, it may not provide the full benefit to manufactures that they’d hope for.

If implemented on the same basis as last year’s reduction, another round of cuts would only apply to NI paid by employees. While this could tangentially support household spending, and therefore demand for consumer products, it would leave employer contribution rates untouched.

This is a much bigger ask from the government in terms of lost tax revenue, and something it may decide is simply unaffordable right now, particularly if it is choosing to prioritise support for consumers.

The road ahead

Other measures that the industry would welcome include reforms to energy and pricing systems to support greater use of sustainable energy sources, as well as a further extension of the freeze to the small business multiplier for businesses in England, which is due to expire after this year.

The former ask is likely to require significant time and consultation to get right – something that is more likely to be kicked down the road, or again penciled-in as a re-election promise, rather than squeezed into this year’s statement. The latter – as we’ve explored in our parallel article on what the Budget might hold for retailers – is probably also a cost too far in a fiscal event that will likely be defined by both restraint and constraint.

Whatever is – or isn’t – on the table once the Chancellor returns to his seat, manufacturers will need to ensure that they are doing everything that they can to position their own businesses for growth, and to support their long-term resilience.

The coming year provides reason for optimism – both in terms of better interest rates promising improvements in the cost of debt and financing, and in supporting stronger consumer demand. Those that are prepared to take the opportunities afforded to them will be in the best possible position to get ahead.